CLSA reverses course and supports India over China

Some experts think it was a play on US stocks, while brokerage firms have stated that the necessity to move fund flows to China was the main reason why foreign portfolio investors (FPIs) sold in India.

The Hong Kong-based brokerage firm CLSA has changed its stance just one month after cutting India's overweight to 10% in order to strengthen exposure to China. The firm said on Friday that it "no longer has sufficient conviction to maintain an above benchmark exposure on Chinese equities into 2025," thus it chose to go 20% over MSCI weight on India.

It's interesting to note that the brokerage made a U-turn barely over a week after Donald Trump was elected president of the United States. In its most recent analysis, "Pouncing Tiger, Prevaricating Dragon," CLSA cited the election results and stated: "The most fundamental requirement in determining our China allocation was to understand policymakers' motivation." Is this a deliberate effort to reroute the economy, or is it just window dressing? We have been left wanting following the National People's Congress's (NPC) plan to rescue local government debt, fearing that the motivation is more in line with the former than the latter.

Regarding India, it stated that it is among the few developing economies where the correlation between changes in the rate of economic output and the rise of corporate earnings is still valid. This is in spite of worries about the last two quarters' sluggish earnings growth.

But not everyone feels that way. Citing slowing profits growth and pressure from foreign investors selling after China's recent policy support measures, Citigroup downgraded India equities from "overweight" to "neutral." The company also stated that Beijing could surprise China with an upside if it fulfills its policy stimulus.

Based on its economic forecasts, CLSA projects a 13% US dollar upside potential (for Indian stocks) over the next 12 months, while Citi has predicted that India's Nifty 50 index will reach levels of 25,000 by September 2025, representing a roughly 6% increase from now.

Some experts think it was a play on US stocks, while brokerage firms have stated that the necessity to move fund flows to China was the main reason why foreign portfolio investors (FPIs) sold in India.

According to Helios Capital founder Samir Arora, FPIs have been selling in India rather than China in order to purchase US stocks. With average Indian stocks down 10-15% and average US stocks up 10% since the end of September, the trade shift from India to the US would have mainly taken place. Arora stated, "Anyone attempting to make this trade right now (sell India, buy US) has already missed a quarter or so of the return."

After China announced stimulus measures to boost its economy in late September, foreign portfolio investors (FPIs) in India started selling aggressively. October saw the largest outflows in a month ever, with the extent of selling even surpassing the outflows saw during the Covid pandemic crisis.

In November, the sell-off continued, resulting in a $13 billion (about Rs 1.12 lakh crore) outflow. The benchmark indices have therefore dropped more than 10% from their all-time highs.

Regarding susceptibility to Trump's proposed tariffs, higher interest rates, and foreign divestment, CLSA thinks India is the best protected market in Asia Pacific and the emerging markets basket. The factors include controllable leverage, India's modest trade exposure with the US, and a notably low and shrinking foreign stock participation.

China, however, is nearer the opposite extreme of this range. The main danger facing Indian stocks is an issuance frenzy that overwhelms the market. A historical tipping point, cumulative 12-month issuance is 1.5% of market capitalization.